Table of contents
Thematic Issue on “Harmonising European Public Sector Accounting Standards (EPSAS): Issues and Perspectives for Europe’s Economy and Society”
Biondi, Y. Harmonising European Public Sector Accounting Standards (EPSAS): Issues and perspectives for Europe’s economy and society, DOI 10.1515/ael-2014-0015
Biondi, Y., & Soverchia, M. Accounting rules for the European Communities: A theoretical analysis, DOI 10.1515/ael-2013-0063
Calmel, M.-P. Harmonisation of EPSASs (European Public Sector Accounting Standards): Developments and Prospects, DOI 10.1515/ael-2014-0018
Oulasvirta, L. Governmental financial accounting and European harmonisation: Case study of Finland, DOI 10.1515/ael-2014-0006
Jones, R., & Caruana, J. A perspective on the proposal for European Public Sector Accounting Standards, in the context of accruals in UK government accounting, DOI 10.1515/ael-2014-0005
Newberry, S. The use of accrual accounting in New Zealand’s Central Government: Second thoughts, DOI 10.1515/ael-2014-0003
Mussari, R. EPSAS and the public sector accounting unification across Europe, DOI 10.1515/ael-2014-0019
Through a non-legislative act concerning requirements for budgetary frameworks of the Member States (Council Directive, 2011/85/EU of 8 November 2011), the European Council has formally started the harmonisation process of European Public Sector Accounting Standards (EPSAS),1 which was prompted by the communication of the European Commission (EC) claiming for “robust quality management for European Statistics,” issued in April 2011 (European Commission, 2011, pp. 8–9):
in line with its proposal for a Council Directive on requirements for budgetary frameworks of the Member States (COM(2010) 523 final), the Commission will support the implementation of public accounting standards providing the information needed to compile ESA-based data for all sub-sectors of general government. This project encompasses the elements needed to build quarterly general government sector accounts and bridge tables between monthly cash-based reports and ESA-consistent quarterly data. Eurostat intends to play an active role within the framework of the International Public Sector Accounting Standards, which promote accrual-based public accounting close to ESA-based principles.
Beginning 2013, the EC has forwarded its assessment to the Council and European Parliament. The report by the European Commission (2013), which was accompanied by a staff working document, was based on information received through consultations with Commission services, international organisations, Member States’ experts and other interested parties. It concludes that, even if the IPSAS cannot be implemented in EU Member States as they stand currently, the IPSAS standards represent an ‘indisputable reference’ for potential development of EPSAS, based on a strong EU governance system. A further phase of elaboration of the EPSAS was then initiated and is currently under development.
Convergence towards International Public Sector Accounting Standards (IPSAS)?
At the present, the European Union informs its inter-state surveillance over public finances through the “European System of National and Regional Accounts” (ESA). ESA provides national accounting information based upon statistical methods. The Budgetary Frameworks Directive claims that complete and reliable public sector accounting practices for all sub-sectors of general government (presumably on accrual basis) are a precondition for the production of these statistics (preamble, point 1), although the latter rely on the previous compilation of cash data, or their equivalent (preamble, point 7).
Furthermore, public sector accounting and reporting do not have a direct connection with internal controls and independent audits that are expected to ensure the provision of raw data for statistical purposes and the application of European fiscal rules based upon those statistics.
The Budgetary Frameworks Directive took momentum from the European sovereign debt crisis that affected some Member States, especially Greece. In January 2010, Eurostat provided a report on Greek Government Debt and Deficit Statistics (European Commission, 2010), showing two linked sets of problems: problems related to statistical weaknesses and problems related to failures of the relevant Greek institutions in a broad sense. However, according to the same report, this lack of quality of the Greek fiscal statistics (and of macroeconomic statistics in general) was specific to the Greek situation and did not concern all the Member States.
From a broader perspective, then, the European reform of public sector accounting and reporting does not relate so much to the European sovereign debt crisis as to a general transformation of public administration and the ongoing process of formation of the European institutional framework. Since the nineties, this process has been influenced by the “new public management” movement (Pollitt, 2014; Biondi & Soverchia, 2014; Newberry, 2014), as well as by the financialisation of economies and societies, including public administrations, that is ongoing in Europe and abroad (Newberry, 2014; Robb & Newberry, 2007).
Concerning the formation of the European institutional framework, a parallel can be established with what happened to accounting and reporting for the private sector. The latter were regulated through two European Directives until the nineties (Fourth Council Directive of 24 July 1978 on the annual accounts of certain types of companies, and Seventh Council Directive of 13 June 1983 on consolidated accounts), leaving more autonomy to Member States. Since 1995, the European Commission (1995) claimed its preference for the adoption of the international accounting standards (IAS) issued by the International Accounting Standards Committee (IASC). A reform process was then started that led to the compulsory adoption of the International Financial Reporting Standards (IFRS) for consolidated accounts of listed companies in Europe and to the delegation of the private sector accounting standards-setting to the International Accounting Standards Board (IASB). At the present, the EC is the major financial supporter of the IASB2 and the European Union stands out as the most significant adopter of the IFRS, while other major jurisdictions such as China, India, Japan and US have preferred to maintain their own standard-setting bodies and their own standards in place (CONVIVIUM, 2013). This European institutional choice raised major issues concerning both the accounting model of reference and the governance of the private sector accounting standards-setting process (Haas, 2013; Biondi, 2012b; Maystadt, 2013).
Concerning the public sector, the IPSAS are developed by the International Public Sector Accounting Standards Board (IPSASB), which is a standing committee of the International Federation of Accountants (IFAC). According to the IPSAS Board, “a key part of the IPSASB’s strategy is to converge the IPSASs with the IFRSs issued by the IASB. To facilitate this strategy, the IPSASB has developed guidelines or rules for modifying IFRSs for application by public sector entities.”3
The report by the European Commission (2013) establishes a clear-cut parallel with the private sector, claiming for EPSAS inspired by the IPSAS and private sector accounting:
The links between the private and public sectors in all EU countries create a strong need for connected financial reporting between these sectors, and accruals accounting systems such as IPSAS are very strongly connected to private sector accounting standards. Governments need to achieve the same high quality and transparency of financial reporting as the private sector. IPSASs are developed by the International Public Sector Accounting Standards Board, which is a standing committee of the International Federation of Accountants.
Implications for and perspectives from public finances
The Greek situation triggered a renegotiation of its sovereign debt out of the market, while disrupting the smooth working of European sovereign debt trading for all the Member States. Greece was no longer able to refinance its debt position in the market and was forced to enter a bailout process jointly managed by the EC, the European Central Bank and the International Monetary Fund. This renegotiation of the Greek debt was accompanied with austerity policies and reforms that are typical of sovereign debt restructurings (SDR) in international finance. Nowadays, the European authorities appear to be interested in extending numerical fiscal rules related to austerity policies over all the Member States, with the relevant exclusion of the United Kingdom,4 making them a structural part of the European institutional framework (Biondi, 2013). For its part, in its annual report published on 29 January 2014, the Council of Europe’s Social Rights Committee (ECSR) notes that European public policies since 2009 have been unable to stem a generalised increase in poverty on European territories. The Committee (ECSR, 2013) identifies some 180 violations of European Social Charter provisions on access to health and social protection across 38 European countries. In the bailed-out countries, the Committee finds several breaches – particularly in terms of wages and social benefits. The Committee concludes that:
The economic crisis in Europe and the austerity measures adopted in response have had a negative impact on effective respect for human rights and especially for social and economic rights. Rights relating to health, social security and social protection with the obligations of significant budgetary effort that they entail are particularly vulnerable in this situation (ECSR, 2013, p. 18).
A similar alert was already provided by the ECSR (2009)’s Conclusions for 2009:
Already in its Conclusions 2009 when it last examined state reports on these Charter rights, the Committee issued an ambitious statement emphasising that the rights must be fully protected, also under conditions of budgetary austerity. The Committee stated that “the economic crisis should not have as a consequence the reduction of the protection of the rights recognised by the Charter. Hence, the governments are bound to take all necessary steps to ensure that the rights of the Charter are effectively guaranteed at a period of time when beneficiaries need the protection most”.(ECSR, 2013, p. 18)
The sovereign debt crisis that afflicted European Member States revealed problems with the market coordination of their interdependent public finances. Member States – which had temporarily profited by increased capital flows at lowering spreads and rates across them during the boom phase that followed the introduction of the common currency (the Euro) – were later confronted with sudden drain of capital flows, disrupted liquidity and climbing spreads and rates during the boost phase that followed the Greek insolvency (Biondi & Fantacci, 2012; Stiglitz & Heymann, 2014).
However, the report by the European Commission (2013) neglects these problems with market coordination, insisting to foster a competitive basis between issuances of sovereign debt by Member States. The report considers this competitive basis as one of the main reasons to explain and justify alleged information needs by the “owners” of those debts:
Governments have a public interest obligation to market participants – owners of government debt securities and potential investors – to provide timely, reliable and comparable information on their financial performance and position, in the same way that listed companies have obligations to equity market participants. Also, there is a need to ensure a minimum level of international comparability, especially as government securities compete against each other in a global financial market, which calls for a system based on general public-sector standards accepted worldwide. With reference to Article 114 TFEU, harmonized accruals accounting would provide greater transparency for the proper functioning of the internal market in financial services, without which there is a danger that owners of government securities would be entering into transactions without a proper understanding of the level of associated risk. This in turn could create a contagion risk, which can be a significant impediment to financial stability.
The report by the European Commission (2013) further argues that Member States should compete against each other for financial resources that are pretended to be available:
Introducing a single set of public accounting standards would reinforce the freedom of movement of capital in the internal market and help investors to compare the financial activities of governments and by consequence permit Member States to compete on an equal footing for financial resources available in the Union markets, as well as in the world capital markets.
This peculiar perspective on European sovereign debts denies both the specific relationship that exists between the monetary basis and sovereign debt and the interdependence links generated by having constituted one monetary and/or economic union among Member States. Moreover, no reference was made to coordination of debt and tax policies that could be important components of a fiscal consolidation strategy at EU level and improve the effectiveness of national action (Monti, 2010, p. 61 ff. and 79 ff.). In fact, consolidated treaties instituting European Union declare that: “The Union shall promote economic, social and territorial cohesion, and solidarity among Member States” (European Union, 2012, art. 3, §3, 3).
This financial market basis for the European (Monetary) Union does not constitute its historical root. In particular, this orientation did not start with the Treaty of Rome, which provided for the free movement of capital. According to that Treaty, abolition of capital restrictions between Member States was to be: (i) “to the extent necessary to ensure the proper functioning of the common market” and (ii) “loans for the direct or indirect financing of a Member State or its regional or local authorities shall not be issued or placed in other Member States unless the States concerned have reached agreement thereon”. A market-basis orientation appears to begin with the Council Directive 88/361/EEC of 24 June 1988 providing for the removal of capital movements controls by mid-1990, as part of a new strategy to develop a European “single market” which has nowadays succeeded a European “economic community” envisioned by the Treaty of Rome.5
By adopting a financial market basis, the report by the European Commission (2013) assumes an alleged identity between private and public debts; management of private and public finances; and accounting and reporting for the respective financial positions and performances. Accordingly, a market basis could be applied to understand and regulate each of them.
In fact, its institutional ruling is expected to settle potentially conflicting interests between lenders and “the poor, the unemployed, the elderly, the sick” (ECSR, 2013, p. 18), all being legitimate constituencies of the public administration as an ongoing entity.
Money and accounting: The Institutional Framework of the European (Monetary) Union
This driving reference to and preference for a market-based view on public finances and accounting constitutes a major socio-economic transformation, as for accounting systems provide rules, incentives and representations which actively frame and shape the underlying organised activities (entities) that those systems make “accountable”. Accounting plays here a distinctive role as an institution that governs these activities (entities) at a distance, through its regulatory action (Hopwood, 1983; Burchell, Clubb, Hopwood, & Hugges, 1980; Robson, 1992; Hopwood & Miller, 1994; Knorr Cetina & Preda, 2005). Accounting and reporting does not determine public policies. In fact, accounting standards (contribute to) set the “rules of the game” that inform public policies. These rules decide which policy is admissible and involve a representation and an implicit assessment of every policy that can be performed within their frame. This regulatory action involves a specific ideational role. Concerning financial (monetary) accountability, the accounting representation drives the very definition of public debt sustainability, defining what is acceptable and permissible among the public administration and its constituencies (including its debt-holders) across events and circumstances. A market-based view allegedly assumes that “money talks”. In fact, money and the mode which money comes through are significant. Money enters the working of public administration accompanied with a rule of accounting (an accounting frame of reference). From a socio-economic perspective, then, accounting defines and controls how money is entered, processed and spent in the public administration working process. Money does not pre-exist to this working process, but it is actively generated and employed within it.6 From an institutional perspective, therefore, accounting defines the rule of law that makes this money power accountable to public administration constituencies (Biondi, 2010). In this context, a market-based view on public finances and accounting provides a peculiar accounting frame of reference. This frame actively intervenes over the working conditions of public administration and of its overall assessment, including in financial terms (Mayston, 1993; Lapsley, Brunsson, & Miller, 1998; Broadbent & Laughlin, 2003).
A presentation of the thematic issue
At the governance level, the EPSAS project should decide if and to which extent EPSAS-setting shall converge towards and adopt the International Public Sector Accounting Standards (IPSAS) that transplant the IFRS in the public sector. At the contents level, the EPSAS project should decide the public sector accounting model of reference for Member States (Biondi, 2012a), the IPSAS having a clear preference for a balance sheet accounting approach and the alignment between private and public sector accounting standards. Both choices may have fundamental implications for the European (Monetary) Union, since accounting and public finances are fundamental elements of its institutional framework.
This thematic issue purports to contribute to the elaboration of EPSAS by offering analyses and perspectives on the harmonisation of governmental accounting in Europe. Collected articles have two purposes: national case studies and further thoughts on issues and implications of this harmonisation project. In particular, Biondi and Soverchia (2014) analyse the accounting system already in place for the European Communities; Calmel (2014) presents the French position, while Oulasvirta (2014) analyses the experience of Finland. Jones and Caruana (2014) offer an UK perspective on the EPSAS project, while Newberry (2014) develops second thoughts based upon the forerunning experience of New Zealand. Mussari (2014) concludes with an overall commentary on standardisation drawing upon the various contributions.
All contributors were invited to consider the following four issues concerning: (i) the governance of EPSAS-setting; (ii) the proper basis of accounting; (iii) the representation and management of public liabilities, including public debt and pension provisions; and (iv) financial sustainability assessment through the net balance of assets and liabilities.
The first issue concerns the governance of the European public sector standards-setting process. Which authority should establish and govern EPSAS? This authority could be delegated to the IPSASB, as it has been the case with the IASB for the private sector. However, this authority may be alternatively granted to Eurostat, to a newly established European Agency, to a coordination of national regulatory bodies or to the European Court of Auditors.
The second issue concerns the relationship between cash basis and accrual basis of accounting. While IPSAS fosters the complete replacement of cash basis with an accrual basis, some Member States such as France (Calmel 2014), Finland (Ouslavirta 2014) and UK (Jones & Caruana, 2014) have preferred a combination of them. Even the European Union has retained this combined approach for its own accounting system (Biondi & Soverchia, 2014). Accordingly, reporting is then deemed to complement, not substitute the budget in the public sector accounting system.
The third issue concerns the liability side of the balance sheet. Following the IPSAS model which retains a balance sheet accounting approach, the questionnaire realised for the European Commission (2012) focalises on the asset side:
The primary objective of the questionnaire on accounting standards was to assess each group of accounting standards against typical features of a standard directly inspired by IPSAS. Similarities have been assessed on presentation of the financial statements (IPSAS 1), time of recording, measurement of assets and liabilities, with a special emphasis on property, plant and equipment (IPSAS 16), along with provision for contingent liabilities and assets (IPSAS 19).
As a matter of fact, the whole liability side appears to be relevant, since sovereign debt issuance is systematically employed to fund and refinance public expenditure over time. The ways employed to account and control for the whole liability side (funded debt; funded and unfunded provisions, including pension and social security obligations) frame and shape the mode of economic organisation of public services, including the definition of their performance and sustainability over time. This is especially critical for employees and social pension schemes that are largely unfunded at the present and controlled through a cash basis of accounting.
The four issue concerns the meaning of the net balance between assets and liabilities. This net balance is a central indicator according to a balance sheet accounting approach. The recommended practice guideline (RPG) issued by the IPSASB (20013) includes this net balance among indicators of long-term fiscal sustainability, defined as “net worth of an institutional unit (or grouping of units) [that] is the total value of its assets minus the total value of its outstanding liabilities”. Its application to public administration generally delivers a material and longstanding negative balance, because public debt issuance and refinancing are employed to persistently fund public expenditure over time. IPSASB (2013) actually includes debt refinancing in the debt dimension of fiscal sustainability:
This [debt] dimension focuses attention on the capacity of the entity to meet its financial commitments as they come due or to refinance or increase debt as necessary. It also focuses attention on whether the entity is vulnerable to market and lender confidence and interest rate risk.(IPSASB, 2013, par. 38)
Such a negative balance presently occurs in France (Calmel 2014), Finland (Oulsvirta 2014), UK (Jones & Caruana, 2014) and the European Communities (Biondi & Soverchia, 2014). Therefore, public expenditure is not covered by current asset, but by future revenue and future borrowing. At the present, this public policy is well established and generally accepted by investors, although it factually conflicts with its representation and control through the net balance indicator. This policy shows an important specificity of public sector relative to private sector accounting and control. This specificity raises the further questions whether the net balance can and should be employed to account and control for public debt (liabilities), implying a radical transformation of public administration’s economy and finances in Europe.
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In 2013, the EC contributed £3,461,965 (that is, 16.2% of total contributions and 12.7% of total revenue) to the IFRS Foundation, which funds the operations of the IASB, more than the major international accounting firms (so-called ‘Big Four’) that contributed £2.5 mil each. EC contribution does not include contributions by some European countries such as France, Germany and Italy.
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The Budgetary Frameworks Directive, Council Directive 2011/85/EU, art. 8. See Biondi (2014) on UK’s public policies in response to the global financial crisis.
The same remark holds for the private sector economic process if bank money creation through lending and refinancing is taken into account (Biondi, 2013b).